Love And Marriage On Wall Street

May 25, 2016

What if the spouse or domestic partner of a stockbroker or trader wants to open an account at a brokerage firm other than the one employing the registered person? Is there an important difference between the registered rep "opening" an account for the spouse/partner versus the registered rep merely handling the mechanics of preparing the new account forms or entering the keystrokes for an online form? If the spouse/partner tells the registered rep to log on to their brokerage account and enter that trade they were talking about last night, does that rise to the regulatory level of the registered rep "entering a trade" or is the trade attributed to the non-registered account holder? Why does Wall Street distinguish between spouses and domestic partners when it comes to regulating registered reps? And how does this get us to Johnny Rotten of the Sex Pistols?

Sadly, today's BrokeAndBroker.com Blog doesn't have a lot of answers to those questions but, on the positive side, we are going to point out how such considerations may arise. If nothing else, take this as a thought piece because a new FINRA rule is coming down the pike and you better be prepared for some of the new requirements and prohibitions. Love and marriage on Wall Street.

Case In Point

For the purpose of proposing a settlement of rule violations alleged by the Financial Industry Regulatory Authority ("FINRA"), without admitting or denying the findings, prior to a regulatory hearing, and without an adjudication of any issue, Edward R. Segur III submitted a Letter of Acceptance, Waiver and Consent ("AWC"), which FINRA accepted. In the Matter of Edward R. Segur III, Respondent (AWC 2015044591701, May 20, 2016).

Background

Segur was first registered in 1998 and from November 2013 to April 2015 he was registered with FINRA member firm Four Points Capital Partners LLC.

The AWC discloses a prior regulatory history consisting of a July 2014 Arkansas Securities Commissioner Consent Order, which imposed upon Segur a $4,000 fine of communicating during a cold call to an Arkansas resident "without reasonable justification that a particular stock would experience a dramatic increase in value." The AWC discloses a second prior regulatory event involving a January 2012 Consent Order with the New Hampshire Bureau of Securities Regulation that imposed a $17,500 fine upon Segur for cold calling a resident whose telephone number was on the National Do Not Call Registry.

In the Name of His Wife

The AWC asserts that:

In September 2014, while registered at Four Points, Segur opened an online trading account at another member firm on behalf of his wife. The account was opened in Segur's wife's name. Thereafter, and while registered at Four Points, Segur accessed the account and made his own trades. Segur never provided written notice of the account to Four Points, notwithstanding that the firm's written supervisory procedures required its registrants to notify the firm, in writing, before opening an outside securities account. By this conduct, Segur violated NASD Conduct Rule 3050(c) and FINRA Rule 2010.

In the Name of Another Guy's Wife

The AWC further asserts that:

While registered at Four Points, Segur and DI's husband opened an account for customer DI. Dl's husband's name was not on the account, and DI never provided written authorization for Segur to accept trading instructions from her husband. Further, Four Points never accepted Dl's account as a discretionary account.
From January to June 2014, Segur exercised discretion without written authorization in Dl's account by taking instructions from Dl's husband to trade in the account. Segur thereby violated NASD Conduct Rule 2510(b) and FINRA Rule 2010.

Internal Review

The AWC asserts that:

On May 1, 2015, Four Points filed a Uniform Termination Notice for Securities Industry Registration ("Form U5") stating that Segur's registration was voluntarily terminated effective April 22, 2015. The Form U5 also disclosed that at the time of his termination Segur was under internal review for "undisclosed brokerage accounts of spouse maintained at another broker dealer."

FINRA Sanctions

In accordance with the terms of the AWC, FINRA imposed upon Segur a $7,500 fine and a 30-calendar-day suspension from associating with any FINRA member firm in any capacity.

Bill Singer's Comment

Out to the Woodshed

As set forth in the Segur AWC, there are two different compliance/regulatory issues. In one, without prior written notice to his firm, Segur purportedly opened an Away Account at another brokerage firm in his wife's name and allegedly traded in that account. In the other fact pattern, a woman's husband opened an account in her name at Segur's employer brokerage-firm and Segur ran afoul of industry rules by accepting orders from the husband in the absence of bona fide discretionary powers from the wife so authorizing her spouse's trades.

I fault FINRA's AWC because we are never informed whether either wife ever complained about the account opening or any of the trading at issue -- did the spouses ratify the cited transactions? FINRA may argue with merit that my concerns don't really matter because the Respondent signed off on the AWC; however, I beg to differ because a concise fact pattern informs the industry as to how a given set of facts may or may not apply to other similar matters. Ultimately, the point in publishing these regulatory settlements is not for FINRA to print out a cash-register tape on which it tabulates its fines and suspensions but for the self-regulatory organization to educate the investing public and industry as to the non-compliant conduct of the FINRA community.

The New Away Accounts Rule

Frustratingly, a lot of what you learned about away accounts may soon be wrong, so make sure to familiarize yourself with the Securities and Exchange Commission's recently approved but not yet effective FINRA Rule 3210 (SEC Approval Order, SR-FINRA-2015-029; '34 Act Rel. No. 34-77550 / April 7, 2016). New FINRA Rule 3210 will replace currently effective NASD Rule 3050. Note the dramatic expansion of "beneficial interest" as set forth in the new rule's Supplementary Material .02:

3210. Accounts At Other Broker-Dealers and Financial Institutions
(a) No person associated with a member ("employer member") shall, without the prior written consent of the member, open or otherwise establish at a member other than the employer member ("executing member"), or at any other financial institution, any account in which securities transactions can be effected and in which the associated person has a beneficial interest.
(b) Any associated person, prior to opening or otherwise establishing an account subject to this Rule, shall notify in writing the executing member, or other financial institution, of his or her association with the employer member.
(c) An executing member shall, upon written request by an employer member, transmit duplicate copies of confirmations and statements, or the transactional data contained therein, with respect to an account subject to this Rule
* * * Supplementary Material * * *
.01 Account Opened Prior to Association With Employer Member. If the account was opened or otherwise established prior to the person's association with the employer member, the associated person, within 30 calendar days of becoming so associated, shall obtain the written consent of the employer member to maintain the account and shall notify in writing the executing member or other financial institution of his or her association with the employer member.
.02 Related and Other Persons. For purposes of this Rule, the associated person shall be presumed to have a beneficial interest in, and to have established, any account that is held by:
(a) the spouse of the associated person;
(b) a child of the associated person or of the associated person's spouse, provided that the child resides in the same household as or is financially dependent upon the associated person;
(c) any other related individual over whose account the associated person has control; or
(d) any other individual over whose account the associated person has control and to whose financial support the associated person materially contributes.
For purposes of paragraphs (a) and (b) of this Supplementary Material .02, an associated person need not be presumed to have a beneficial interest in, or to have established, an account if the associated person demonstrates, to the reasonable satisfaction of the employer member, that the associated person derives no economic benefit from, and exercises no control over, the account.
.03 Transactions and Accounts Not Subject To This Rule. The requirements of this Rule shall not apply to transactions in unit investment trusts, municipal fund securities as defined under MSRB Rule D-12, qualified tuition programs pursuant to Section 529 of the Internal Revenue Code and variable contracts or redeemable securities of companies registered under the Investment Company Act, as amended, or to accounts that are limited to transactions in such securities, or to Monthly Investment Plan type accounts.
.04 Accounts At a Financial Institution Other Than a Member. With respect to an account subject to this Rule at a financial institution other than a member, the employer member shall consider the extent to which it will be able to obtain, upon written request, duplicate copies of confirmations and statements, or the transactional data contained therein, directly from the non-member financial institution in determining whether to provide its written consent to an associated person to open or maintain such account.
.05 Other Financial Institution. For purposes of this Rule, the terms "other financial institution" and "financial institution other than a member" include, but are not limited to, any broker-dealer that is registered pursuant to Section 15(b)(11) of the Exchange Act, domestic or foreign non-member broker-dealer, investment adviser, bank, insurance company, trust company, credit union and investment company.

Questions for a Digital Age

I fully appreciate, understand, and respect the serious concern about having folks who are subject to Wall Street regulation open accounts away from their employer firm and engage in trading away from their employer firm. It is nearly impossible to expect the employer's supervisory system to work if trading occurs out of sight at another firm -- and there is little doubt that such a construct will thwart the best-intentioned in-house compliance protocols.

Pending Rule 3210(a) prohibits an associated person from opening or otherwise establishing an away account "in which the associated person has a beneficial interest." If we consult Rule 3210 "Supplementary Material .03" we are informed that there is a "presumption" of beneficial interest and a "presumption" that the associated person "established" an Away Account where the account title is in a spouse's name (among other indicated categories of persons).

For whatever it's worth, the Rule does not "deem" the existence of a beneficial interest but merely "presumes" that one exists within a spousal relationship -- which, okay, is a fair enough presumption. The presumption is rebuttable upon a showing of proof "to the reasonable satisfaction of the employer" of the absence of economic benefit to and the lack of control by the associated person. If your head is spinning with the concepts of deeming, presumption, rebutting, opening, and establishing, you're not alone.

Frankly, the drafting of Rule 3210 could have been undertaken with a bit more precision. For example, consider this:

3210(a) and (b) reference the "opening" of away accounts and "otherwise establishing" away accounts.
Supplementary Material .02 makes no reference whatsoever to the presumption that an associated person "opened" the away account: The section only talks about having "established" an away account.

Is there a difference between opening and/or establishing away accounts? Exactly how does a non-associated spouse open or otherwise establish a brokerage account in their own name without the presumptions coming into play?

Similarly, note the difference in coverage under Supplementary Material .02 for a spouse, who is not required to live in the "same household as or is financially dependent upon the associated person," versus a child, who is subject to those requirements. Consequently, if you are legally separated and not living under the same roof with your spouse, you would still be deemed to have a beneficial interest in and to have established the spouse's away accounts. If your spouse is financially independent that does not alter the presumption, as the financial issue at play is whether the registered person derives an economic benefit from the subject account.

Finally, let's mull over what happens if you are living with someone but not "married" to that person. In a non-marital relationship, your partner would seem to fall under Supplementary Material .o2(d), which only comes into play when you have control over your partner's away account and you materially contribute financial support to that partner. Sort of raises some interesting legal questions about whether the courts would sustain such disparate standards based upon whether one is married (same or different sex partner) or in some civil union or in some other domestic partnership relationship that is not deemed to produce a legally recognized "spouse." In some sense, this comes off as a marriage penalty and in other ways it is an uncomfortable intrusion into the bedroom. The abuse that occurs in away accounts is well documented, however, so Wall Street's regulators clearly have an issue in search of rational regulation. The question is whether or not the proposed new rule will prove effective in addressing the competing regulatory and social concerns. Only time will tell.

SEC Approval Order

FINRA's Second Amendment

All of which reminds me of Johnny Lydon a/k/a/ Johnny Rotten and his post-Sex Pistols' band Public Image Ltd. Remember the lyrics from "Rules and Regulations":

Rules and regulations
Rules and regulations
Have no fear of laughter
Wait for what comes after
It's you they're looking out for
It's you they're coming after
Innocent not guilty
Not to this committee

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